SPACE CRUNCH: Retail market remains tight across region

Gary Dinges @gdinges

Thursday

Jan 18, 2018 at 12:01 AMSep 22, 2018 at 3:40 AM

A lot can change in a decade.

Take the local commercial real estate market. Ten years ago, the very first phase of the Domain in North Austin was just getting off the ground. So was the Hill Country Galleria in Bee Cave. And Ikea had just opened its doors in Round Rock.

Thanks to those developments – and countless more since – the Austin metro area has added almost 12 million square feet of restaurant and retail space since 2007, going from 37 million square feet then to 48.8 million square feet at the end of 2017, according to Weitzman, a commercial real estate firm with offices across Texas.

The market has had no problem digesting all that new space, Weitzman found. In fact, the occupancy rate now – 96 percent – is higher than the 92 percent occupancy rate back then.

"Austin is still the strongest retail market in Texas, and Texas is still the strongest overall market in the country," said Britt Morrison, a senior vice president in Weitzman’s Austin office.

Demand catching up with supply

So far in 2018, Morrison said he’s seeing "across-the-board strength" in the Austin metro area, with "the usual suspects" – downtown Austin, East Austin, North Lamar Boulevard, South Lamar Boulevard, South Congress Avenue and Burnet Road – leading the way.

But it’s the suburbs – where there’s plenty of available land to build on – where much of the new development has been happening. Chains that have found themselves locked out of Austin proper due to a lack of desirable vacant space are quickly snatching up those storefronts, Morrison said.

"Demand in the suburban markets is catching up with supply," he said.

Work is wrapping up on Belterra Village in Dripping Springs, for instance. The development, an Endeavor Real Estate Group project, will include a 14-screen Sky Cinemas theater, as well as new locations for Spec’s, Breed & Co. Ace Hardware, Gold’s Gym and Torchy’s Tacos, among others.

Nearby, H-E-B, the area’s dominant grocer, has stashed away land for a future development.

In Georgetown, meanwhile, grocer Randalls opened a store this month in the new Oak Meadows Marketplace shopping center.

In total, the region added 640,100 square feet of retail space in 2017, Weitzman found, down considerably from 1.1 million in 2016. Despite high occupancy rates and even higher demand for space, expect that trend to continue, Morrison said.

"In past upward cycles, especially in a strong economy, we would see new construction increase to the point it would overtake demand," he said. "Nowadays, no one wants to get too far out over their skis, so the past decade has been one of the slowest ones ever in terms of new space, which has led to this continuing cycle of tight retail availability and stability."

Rising rents

The region’s space crunch means rent, for the most part, isn’t cheap, according to Weitzman.

Small-shop space in Class A centers – the best of the best – is going for more than $30 per square foot, on average. Some newer centers in prime locations are topping $40 and even $50 per square foot.

Space in Class B centers typically runs somewhere between $20 and $30 per square foot, while some Class C space can be had for less than $20 per square foot.

Morrison’s best advice for merchants looking to enter the market – or expand their presence here? Be patient.

"When vacancy is low and rents are high, there can be a sense of urgency to find a space and get open as quickly as possible in order to not ‘miss out’ on the success of the market," he said. "Unfortunately, oftentimes taking this approach can lead to compromising on key location factors – settling on an inferior location, taking more space than is needed, etc.– which can be harmful to a particular business model."

‘Right type of retail’

Expect the space crunch to continue for the foreseeable future, Morrison said.

Target, for instance, was so eager to open near the University of Texas campus that the discount chain took over almost all the available small-shop storefronts in the Dobie Twenty21 project on Guadalupe Street, piecing together enough space for a small-scale store that opened late last year.

While some bigger spots have opened up around the Austin metro area as big-box stores such as OfficeMax and Golfsmith have retrenched, Total Wine & More, HMart and others have quickly taken their places.

In addition to Belterra Village in Dripping Springs and Oak Meadows Marketplace in Georgetown, other new projects under development include Stratus Properties’ Lantana Village at Southwest Parkway and West William Cannon Drive in Southwest Austin, which will include a Moviehouse & Eatery dine-in theater.

In Round Rock, the Crossing Point shopping center has risen on the site of an abandoned Garden Ridge store. Tenants there are set to include Crunch Fitness, The Tile Shop and Salon Suites.

And in East Austin, Aldrich Street is one of many projects welcoming businesses in the Mueller development while, at the same time, work is continuing a few miles down Interstate 35 on Endeavor’s redevelopment of Plaza Saltillo, a partnership with Capital Metro. A number of restaurants and bars have already committed to Plaza Saltillo, including Ginger Man and Snooze.

But what Morrison said is really needed – and what we’re not likely to see, at least not anytime soon – is more grocery-anchored centers.

"There is definitely a need for more of the right type of retail," he said. "We expect to see another slow year for new development in 2018 and 2019. There is such a pent-up demand for grocery-anchored space in Austin right now, it’s not unheard of to have a center 90-plus percent leased prior to delivery. Unfortunately, with H-E-B only rolling out one or two locations a year max, the outlook on new grocery centers for the foreseeable future appears to be thin."

Morrison said businesses expected to lease the most space in 2018, when they can find it, include those in the restaurant, fitness, entertainment, medical and beauty categories. Medical, in particular, is hot, he said.

"From a tenant standpoint, service and specialty medical users are just as likely to lease space in a traditional shopping center as a retailer or restaurant," he said. "Ten to 15 years ago, medical tenants were almost exclusively relegated to medical parks. Today, almost every new shopping center has its fair share of medical tenants from dentists to dermatologists."

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